SCENARIO ANALYSIS Huang Industries is considering a proposed project whose estimated NPV is $12 million. This estimate assumes that economic conditions will be “average.” However, the CFO realizes that conditions could be better or worse, so she performed a scenario analysis and obtained these results: Economic Scenario Probability of Outcome NPV Recession 0.05 ($70 million) Below average 0.20 (25 million) Average 0.50 12 million Above average 0.20 20 million Boom 0.05 30 million Calculate the project’s expected NPV, standard deviation, and coefficient of variation.
SCENARIO ANALYSIS Huang Industries is considering a proposed project whose estimated NPV is $12 million. This estimate assumes that economic conditions will be “average.” However, the CFO realizes that conditions could be better or worse, so she performed a scenario analysis and obtained these results: Economic Scenario Probability of Outcome NPV Recession 0.05 ($70 million) Below average 0.20 (25 million) Average 0.50 12 million Above average 0.20 20 million Boom 0.05 30 million Calculate the project’s expected NPV, standard deviation, and coefficient of variation.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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SCENARIO ANALYSIS Huang Industries is considering a proposed project whose estimated NPV is $12 million. This estimate assumes that economic conditions will be “average.” However, the CFO realizes that conditions could be better or worse, so she performed a scenario analysis and obtained these results:
| Economic Scenario | Probability of Outcome | NPV |
| Recession | 0.05 | ($70 million) |
| Below average | 0.20 | (25 million) |
| Average | 0.50 | 12 million |
| Above average | 0.20 | 20 million |
| Boom | 0.05 | 30 million |
Calculate the project’s expected NPV, standard deviation, and coefficient of variation.
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